Citizens incomes and progressive tax.

Edited extracts from e-mail discussions and elsewhere, 1991-2013.

Basic Incomes and Progressive Taxes.
A. Marshall, September 1991.

Progressive taxes are taxes which take a higher proportion of high incomes than of low ones. Regressive taxes do the reverse, and flat or proportional taxes take the same proportion of all incomes. Although progressive taxes are nearly as popular ideologically as motherhood and apple pie, in practice taxes on low incomes are often so high that they are unfair and demoralising. The new 93% tax on some superannuitants income is a good example. If benefit abatement is counted as effective tax, marginal taxes* on low incomes are usually higher than those on high incomes.

But with a universal grant or basic income* system there is no abatement of benefits, and there is the opposite tendency for taxes on low incomes to be too low. . . High incomes would be reduced and low incomes increased if all income was taxed at the highest tax rate, and the extra revenue paid in equal amounts as benefits, tax rebates or basic incomes to all. This is because the extra tax paid by anyone with a high income would be greater than the extra paid on a low income.

The choice is between a high tax rate on all income to reduce inequality, or graduated marginal tax rates to encourage low and middle income people to work harder. At a time when there is not enough paid work for everyone who wants it, I think it is at least as important to reduce inequality as it is to put pressure on people to look for work.

X: I’m not proposing that we have a flat tax rate (for reasons I’ve gone into in the past). I would suggest thinking of a top rate of tax which is twice as high as the bottom one and see where that gets us. … If anyone sees any problems with the logic of any of this so far, or has any great objections then let me know.

A: My objection is that by having progressive taxes instead of a flat tax, you are reducing the tax on a high income more than the tax on a low income.

For example, if income up to £30000 is taxed 22 percent instead of 43 percent, the difference for a rich person is £300 x 21 per year on the first £30000 of his income, while for someone earning £15000 per year the difference is only £150 x 21.

Better to tax them both a flat 43 percent, and use the extra revenue to increase the Citizens Income*. The flat tax reduces inequality more than the progressive tax does.

X: You argue that it would be more redistributive to tax all incomes at the higher rate and dish it out via the Citizens Income. Of course this is true – it is obvious. However, you have simply increased the amount of tax taken and dished it out to everyone. This is not the same thing as saying that flat rate taxes are inherently more progressive.

Of course, it would be even more redistributive to do away with the lower tax bands and tax everything 60% but this will increase the overall percentage of income taken in tax, and there are limits to which people will accept this, although higher taxes for higher earners are more publicly acceptable. Also, the notion that if the Citizen’s Income is too high and paid for by too high a level of taxes then there will be no real incentive to work is also very valid.

I hope this has convinced you that, for any given level of Citizen’s Income paid for by any given average level of Income Tax, it IS more progressive and redistributive to have progressively increasing tax bands.

A: The limiting factor in my opinion is how much it is economically and politically possible to tax the rich. For any particular top tax rate, the most redistributive non-regressive system is the flat tax system.

The lower middle rate and higher top rate in the progressive system may be preferable politically, but the lower top tax rate in the flat system may be more important economically because rich people have more opportunities for tax avoidance. And as you said, its obvious that a higher average tax rate is balanced by the higher Citizens Income.

X: As the Thatcher government lived with a top rate of 60% for the rich for a decade, then I think to suggest it as being “unrealistically high” seems a bit daft.

A: During that decade the Keynesian consensus was replaced by a more right-wing one, in the USA and New Zealand and other places as well as in Britain. Due to globalisation it may be difficult for any one country to decide all by itself to revert to higher taxes, because of the risk of capital flight, a brain drain, competitive disadvantage, etc. Also the electorate is more right-wing now. Anyway I think 50 percent tax, including VAT, is about right, until land tax and other resource taxes are substantially increased instead. I think top tax rates were too high in the Keynesian era.

X: If you listen to all the arguments about “stealth taxes”, you’ll see that the average rate of income which people pay in taxes IS an important issue.

A: The average tax including the Citizens Income as a tax rebate or negative tax is important, the average tax rate excluding it isn’t. In the examples in the previous message the average net tax rate* for the whole population was zero, because all the tax revenue was paid back as Citizens Income.

X: People are more prepared to accept higher marginal tax rates for those who are more able to pay

A: I already agreed with this, that a high top tax rate and moderate middle tax rate may be better politically. But at least the tax at the bottom end of the scale should be flattened by making it equal to the tax in the middle band. Before increasing the tax at the top end of the scale, first collect the less damaging revenue available at the bottom end. Higher taxes at the bottom end of the scale will be to the advantage of low income earners whose tax is increased by less than the increase in the Citizens Income, and there are fewer marginal taxpayers there than in the middle band.

X: Why don’t you think its acceptable to have higher rates of tax for higher earners?

A: I do want higher average net tax rates for higher earners. For marginal tax rates there are pluses and minuses, and I think 50 percent is a good compromise.

Benefits are really negative taxes and taxes are really negative benefits, so it’s misleading to look at taxes and benefits separately. A flat tax system with a universal grant or Citizens Income* gives more progressive average net tax rates* than a system with progressive marginal tax rates*, a tax allowance, the same top tax rate and the same net revenue. (ammpol.wordpress.com/ammgraf).

But most cost calculations limit Citizens Incomes to the low, mean value which is all that can be afforded if there is an insistence on progressive marginal tax rates. The Citizens Income (CI) would be much more affordable if more revenue was collected at the bottom end of the income range. This would not just increase tax on low incomes. A high income would include the full range of income on which tax was increased, a low income would include only part of it.

With the same top tax rate and net revenue, a higher CI and more progressive average net taxes can be achieved with a flat tax than with progressive marginal taxes. But flat tax is unpopular because the conventional opinion is that tax should be progressive. What the opponents of flat tax are actually doing, perversely and counter-intuitively, is favouring inequality. In a choice between progressive marginal tax or progressive average tax, everyone who is concerned about poverty should prefer progressive average tax.

An effective Green tax shift is being prevented by the widespread belief that progressive income taxes are essential for wealth redistribution. Flat (on average) eco-taxes could be better than progressive income taxes, not only for the environment, but also for reducing inequality. (ammpol.wordpress.com/ammgts)

Coalition policy, 2010.
A. Marshall, 2010.

The Liberal Democrats’ income tax policy is a spectacular example of something I’ve been saying for 30 years: that making marginal tax more progressive doesn’t necessarily make average tax more progressive.

Progressive marginal tax is a sort of religious belief in left-wing politics. In this version, the personal tax allowance is increased so that tax on low incomes is cut.

. . . George Osborne’s . . . plan to claw back child benefit from those on £50,000 a year or more . . . ranks as one of the most impractical policies ever created by a government. . . the administration, paperwork and confusion created by the new tax looks out of all proportion to the sums the Chancellor hopes to raise.

. . . About 500,000 extra people will be dragged into the quagmire that is the annual self-assessment process. Checking that taxpayers are complying will require Revenue snoopers to pry into the living arrangements of couples and to deal with the challenges of relationship break-ups, divorce and separation.

And even if parents do not want to claim the money, they must still complete child benefit forms for any offspring born in the future, or risk jeopardising their own entitlement to a State pension.

. . . Just before Christmas, this paper revealed that there would be more Revenue staff involved in administering the new tax charge than are employed chasing wealthy tax dodgers . . . Now it has emerged that the Revenue has written to fewer than three-quarters of the families it expects might be affected by the new tax. Its records are not accurate enough to alert the other 300,000 . . . it is certain that tens of thousands of families will be tripped up by the new tax regime. Unless the taxman takes a sympathetic approach, they will face fines and interest charges 12 months from now . . . Having forced through such an unwieldy policy against all the best advice, the Chancellor should at least ensure that those caught in the net are not unjustly punished.

A Basic or Citizens Income is an income paid as a tax rebate or benefit to every adult citizen regardless of other income.
The average tax rate is the total tax as a proportion of the total income.
The marginal tax rate is the tax rate on the last part of an income, and so on any increase in that income.
By average net tax rate, I mean the average tax rate including benefits or the Citizens Income as negative tax.